White Paper Are SaaS and Cloud Computing Your Best Bets? Understanding SaaS and Cloud Computing and Service Delivery Options for Real Estate Technology Solutions Joseph Valeri, MBA, MS President, Lucernex Technologies
Executive Summary Today, real estate companies have many options to consider when selecting software. Of course, the first step is gaining a good understanding of how the technology solution will help them manage their operational activities, control their costs, and reduce their risks. These benefits can then be compared with the total costs of ownership, which is usually the first place business leaders tend to focus. As the technology offerings have matured and the Internet has become more stable and secure, there are many other factors that need to be considered as well. These include whether to buy or build the application, own or lease the software, or use existing IT resources and equipment. Joe Valeri, President of Lucernex Technologies, has prepared a series of discussion documents on these three critical decision factors: 1) Is SaaS and Cloud Computing Your Best Bet? 2) To Build or To Buy That Is the Question 3) Single Technology Platform Versus Multiple Technology Solutions This article looks at the major technology changes impacting the licensing and delivery of real estate software solutions. It discusses how to evaluate these new options in order to make the best decision for your computing needs and a decision that fits within your corporate culture. While the focus of the discussion is on real estate technology and solution providers, the concepts are applicable across industries. Contents Introduction Definitions o Cloud Computing o SaaS Applications and Licensing o Perpetual Licensing What s Happening and Why o History of Cloud Computing o Today s Computing Infrastructure What s Not Happening and Why Not o All or Nothing? o Security Perceptions o Changing Licensing Agreements o Vendor Readiness o Changing Role for IT Conclusion Page 2
Introduction The world is experiencing a major technology shift. As short as five years ago, SaaS application delivery and Cloud computing were considered technology trends that were not yet business ready. Most vendors were struggling with how to incorporate these new technologies into their design and development. Most companies were not eager to consider housing any of their data outside the walls of their own data center. Today, it is a different story. Vendors have figured out how to design software solutions that capitalize on the flexibility of SaaS delivery and Cloud hosting. In turn, businesses have begun to recognize that these alternatives provide cost effective and reliable solutions for housing and managing some data and software applications. Making the decision, whether you are the business or technology leader, can be daunting. It can be very confusing determining what, how, and when to incorporate one of these technologies into your IT platform. This paper discusses SaaS applications and Cloud Computing by providing information on: Basic definitions Why the switch to Cloud Computing is gaining so much momentum Pros and cons of perpetual vs. SaaS application licensing Decision considerations for evaluating and selecting a new technology solution Definitions Cloud Computing, also referred to as Utility Computing is a shared IT infrastructure. It is a data center that: is typically external to your company or exists inside your company as a unique, segregated component of a larger data center utilizes virtualization technology has been designed from the top down to most effectively and efficiently manage data and application provides an incredibly high level of security Cloud Computing allows companies to access a wide variety of software applications without having to endure the expense and long wait times of getting internal IT departments to procure equipment, install software, and configure applications within their network. Cloud computing is used for many different reasons including document storage, off- site backup, collaboration applications (i.e. Google Apps or LiveOffice) as well as business applications such as salesforce.com. Page 3
The promise of Cloud computing is cheaper, faster, and more secure data and systems management. It is now being considered by IT and business thought leaders alike as the future delivery infrastructure for all software applications. Cloud computing can be offered in several different forms: Private cloud: an infrastructure that is created within a company to house all applications, programs and data in a central repository accessible via the internal network. Public cloud: an infrastructure that allows a company to rent space in a public, secure cloud center. Hybrid cloud: an infrastructure that combines the benefits of the public and private cloud and provides flexibility for each particular application Software- as- a- service (SaaS), also referred to as on- demand a software is application software that can be delivered to end users via a web browser rather than through software that is stored on desktops. Rather than being owned, SaaS software is licensed as a subscription service or through lease fee. These types of fees are typically paid annually and, in total, far less than comparable software delivered using the perpetual or traditional software model. Because SaaS applications can be delivered through a web browser, it is often considered the same as Cloud Computing, but it is not the same thing. Some SaaS products are offered in the Cloud and some are delivered via the software provider s network. Perpetual licensed software is software that is installed on a company server and/or user desktop and is purchased rather than leased. In addition to the one-time purchase, which can be quite large, there is a smaller annual maintenance fee. What s Changing and Why In October of 2005, Bill Gates sent a memo to Microsoft s top management sounding the alarm that the rise of utility computing threatened to destroy its core business. Microsoft, at the time, was a pure perpetual software vendor, selling all their software to be installed on a customer computer or server, and charging large fees up front with a small annual maintenance fee. Page 4
Microsoft was not alone as a perpetual software vendor; this was, and continues to be, the way virtually all vendors in the retail real estate space provide software. The costs of such software are not limited to the one- time ownership fee, but also to the purchase of expensive hardware, such as multiple servers, for the internal data center behind the corporate firewall. The alternative that spurred Microsoft to action was utility computing. In his book, The Big Switch, Nicholas Carr makes the case that the business model of providing perpetual software licenses simply cannot survive much longer. Mr. Carr begins by discussing how the introduction of the electricity grid dramatically shifted competition. Electricity became available to all companies, even those that could not or would not invest in a costly power infrastructure. Companies who had relied on an internal infrastructure to produce their electricity lost a significant economic competitive advantage. Mr. Carr goes on to draw a telling analogy about how utility computing will cause the same Big Shift. The costs and benefits of implementing and maintaining an internal data center can and will be replaced by Cloud Computing centers that will be available to all companies. Much like electricity, companies that embrace the utility computing grid can provide their products far cheaper. Companies that lagged behind in adopting the electricity grid were driven out of business. With utility/cloud computing, the same shift has already started. It is already impacting software pricing in the real estate software industry. More support for Mr. Carr s argument can be seen by the rapid growth and success of Salesforce.com. Salesforce.com entered the Customer Relationship Management market as a SaaS application and has taken over that industry. While brilliant business execution played a major role in Salesforce growth, its success can also be attributed to a shift in user attitude. For example, many of you reading this article right now are in a company that uses Salesforce. Ten years ago, you would have been using Seibel, which was sold under a perpetual license model. As Salesforce rapidly stole market share, it became clear that Seibel could not compete with Salesforce in cost and implementation ease, and their best option for survival was through acquisition by Oracle in September of 2005. Large technology vendors are making investments to ensure that the move to cloud computing can and will continue. Google, IBM, Microsoft and Amazon, as well as several others, have invested billions in infrastructure and have thousands of server farms already up and running all around the world to support a massive cloud infrastructure. If you use GMAIL, Hotmail, Live Office, YahooMail, Flickr, Facebook or most other major sites on the Internet, you are already using the cloud and may not realize it. Page 5
What s Not Changing and Why Not So if technology companies are building the platform, and the cost / benefit of SaaS and Cloud computing is a reality, why are so many companies still investing in technology the old way? Several factors are still at play: Notion of it must be all or nothing Misconceptions about data and application security Understanding the change in licensing agreements and new cost/benefit models Readiness and stability of SaaS vendors Changing Role of IT It s All or Nothing Companies are beginning to realize that it is not an all or nothing decision. The emerging thought leadership is suggesting a rule of thumb - - if you can find a product that meets your functional and security requirements, move to the Cloud. Of course, a major part of this reasoning is based on costs. Buying applications under a perpetual licensing model will continue to have a higher cost structure when considering the total cost of ownership purchase price, data center infrastructure, annual support and maintenance for software and hardware and the ongoing IT staffing costs. This rule of thumb does not apply, however, to those systems that contain (and manage) the DNA that makes the company special and unique. For the most part, these are systems that have been internally developed or highly configured or customized. These systems truly cannot be replicated in the open market, and are better suited for delivery via in- house data centers or in a private cloud. Security Perceptions There is still a concern that a Cloud infrastructure is not as secure as an internal data center. While we recognize that security is a critical component of any system, the fact is that most companies cannot match the time, resources and sophistication of technology that cloud computing centers devote to this issue. Cloud software providers typically use a third party Cloud hosting center a center whose core competancy is providing high performance networks and protecting data. It would be hard to find an internal IT department that can provide more security than a company whose core competency is data security. Data protection IS their business. Harkening back to Mr. Carr s analogy, the exact same argument was made by many now defunct companies when the electricity grid came online no one can produce the amount and quality of electricity I need as well as I do. One way to evaluate a Cloud Computing or SaaS vendors focus on security is to review their ISO 9001 certification or a SSAE 16 audit. These are indicators of a Page 6
dedication to customer satisfaction as well as to the ability to secure your application and data. Changing Licensing Agreements There is a great deal of confusion and many misconceptions around the differences between cost structures for SaaS and perpetual software licensing models. And, much of this confusion seems to be introduced by the real estate software vendors themselves. Many of these vendors are selling products that are based on a perpetual software license, installed behind the client firewall. However, they are offering these solutions under a subscription pricing model so that the solutions have the feel of a SaaS model. Software delivered via the perpetual or traditional software model are typically installed inside the client firewall. When comparing costs, it is important to remember that perpetual systems require a very large upfront effort, which manifests as high costs and long implementation times. It takes a lot to get a large enterprise system running inside a company s firewall and on a company s unique combination of technologies. The lists below describe the requirements for installing software under a perpetual software licensing and a SaaS licensing. Perpetual software requires: A large upfront software fee for the vendors product Third party software fees for separate but required products (for real estate it is typically reporting, workflow, analysis and demographics solutions) An investment in hardware within the client firewall An investment in a large IT project by the customers staff An often large implementation fee to retrofit the vendor product into the clients unique combination of technologies Months of business resources time spent on the IT project instead of on mission critical business needs Annual maintenance of 18% to 22% of the initial software fee Cost example: In the lease administration software space, one of the market leaders, requires a minimum of 5 servers and several third party licenses costing over $100,000 BEFORE the customer even pays for internal IT costs, the vendors software, maintenance or implementation fees. SaaS solutions require: An annual subscription to the vendors SaaS cloud delivered service. This fee is typically 1/5 to 1/3 of a comparable perpetual product license cost, Page 7
An implementation fee for a typically 4 to 16 week project focusing on data conversion and client process design. No time spent on fitting vendor architecture into the clients network. SaaS requires no third party licenses, no hardware, no internal IT project and no long implementation. The subscription fee for a SaaS Lease Administration solutions will typically be half of the cost of a perpetual license BUT with: no upfront fees no internal IT cost an implementation focused solely on getting the clients data and processes into the system with no time spent figuring out how to get it to work in the clients data center and network When you add in all actual upfront costs of buying a perpetual solution, it will often be 3 to 5 times the cost of a SaaS solution in the first year and 2 to 3 times the cost over 5 years. Clearly, there is a major difference in the costs between vendors who can provide a true SaaS and Cloud- delivered solution. In an effort to compete, the vendors who license their products under a perpetual model providers are dropping their software prices and making up their profit on services fees. One must ask whether this is a business model that can be sustained. Vendor readiness and stability It is important to keep in mind that Cloud Computing is not a pricing model; it is a delivery model. True Cloud vendors have embraced the utility computing model and have redesigned their products and platforms (no small undertaking) to be optimally delivered via the Cloud. In doing so they have taken advantage of the cloud utility grid, like the electricity grid, and have dramatically driven down operating costs. In evaluating a vendors SaaS and Cloud Computing readiness, it might be helpful to look at the Microsoft timeline. Microsoft began a process of moving their products to the Cloud after the Bill Gates pronouncement in 2005. (You can already see this in their push for Microsoft OfficeLive, which provides all the benefits of Microsoft Office in the Cloud, including file storage and free upgrades to new version of Office without the stress of loading it on your computer. ) It took Microsoft almost 5 years to convert to this new infrastructure, and they have near unlimited resources. Page 8
Keeping scale in mind, try to consider how long it might take for a vendor who is still operating in a perpetual platform and design to move to the Cloud. Another consideration when evaluating SaaS solutions and vendors is looking at the delivery infrastructure. While some SaaS products are offered in the Cloud, some are delivered via the software provider s network. These networks may not be as secure and or as diligently maintained as those in a Cloud Center. Vendor business model stability When looking at a perpetual license versus a SaaS license, companies today would be better served to focus on vendor business model stability.. It is not clear how long software vendors who are providing solutions via a perpetual licenses will be able to remain competitive and viable. For some real estate software companies, the inability to redesign their software to allow for a more flexible delivery platform has meant losing control of their product, either because they have gone out of business or have been taken over by a venture capital group or other non- real estate solution provider. In either case, the impact on the original product is unclear and uncertain. A collapse might mean they go out of business but it will more likely come as a takeover by a Venture Capitalist, or private equity group or by the likes of Oracle or IBM who may kill the product and convert clients to their, non- real estate, non- retail focused platforms (which are also still Perpetual models!). Changing Role for IT Another part of the discussion about Cloud or non- Cloud speaks to the ability and maturity of the IT departments. As IT departments become more able to understand and translate the risks and rewards of new application delivery methods, there will be increased movement to the Cloud. As an example, an IT Director at a major retailer recently explained that they are changing their focus as the purpose of IT is shifting. Recognizing the power of SaaS solutions in enabling growth and mitigating risk, he has been able to realign his team to focus on systems that are unique to their business, such as merchandising management, and are part of the company s core competency. To ensure this understanding and alignment, they are moving many IT resources away from the data center and infrastructure and onto the business units, not only to provide better service, but to help the business leaders in their software decision making including assisting with the selection of SaaS providers. This is representative of the change coming to the role of in- house IT in most companies. Instead of the majority of IT staff being utilized to maintain hundreds or thousands of internal servers and systems, IT will focus its attention on how to optimize and improve core systems that make the company unique. IT management Page 9
will also be better equipped to represent the business units in selecting the right SaaS solution. IT will be even more important is turning technology expenditures into quantifiable company performance gains. This change also means that business users will be able to implement technology faster as the lighter project load on IT means truly critical systems will get done faster while systems better delivered via a vendor SaaS product can be implemented quickly outside the firewall using vendor or consulting resources. Another reason for the reluctance to move to SaaS and Cloud computing comes from the IT departments, who continue to recommend perpetual license models. As the designated guardians of data and applications, many of these groups have not had the time or taken the time to investigate the pros and cons of moving to the cloud. In addition, some of the IT leaders have not looked strategically at the value of shifting their focus from routine data center management to technology that can more directly impact the revenue and profit of the business. Conclusion Cost containment and corporate agility are key factors for success in today s shifting economy and business environment. Cloud- delivered SaaS applications support the flexibility that businesses need while also establishing lower, predictable costs. This type of technology infrastructure allows companies to transfer hardware ownership and maintenance costs to a vendor who can provide these services e more economically, efficiently and securely. Use of SaaS/Cloud solutions also allows companies to redeploy their IT staff to focus on their core business to understand and automate key processes, provide operational intelligence and manage the corporate knowledge bank. All of these activities will provide a competitive advantage and let the company respond more quickly and accurately to a rapidly changing business environment. Real Estate has traditionally been a lagging adopter of new technology; however, we are seeing a tremendous increase in the interest and demand for Cloud- based solutions among real estate companies of every size. We are proud to be one of the first vendors in this industry to respond to these needs and offer a robust and secure computing environment to manage the life cycle of real estate for retailers and corporate leaders. In addition to the value of Cloud delivery, our products are also built on one platform with one database and one user interface. To understand how this design adds to your corporate agility, please read our White Paper, Point Solutions versus Integrated Solutions, the second in this series of articles. Page 10
About Lucernex Founded in 2000, Lucernex Technologies provides real estate professionals with powerful software tools to guide them through the real estate development process while also managing any size portfolio of leased and owned properties. It is the only solution designed by retailers for retailers. For nearly a decade, Fortune 500 companies in the commercial real estate, hospitality, retail, construction and engineering industries, both in the United States and Europe, have been utilizing Lucernex Technologies software solutions every day to ensure compliance, mitigate risk and empower effective growth. As an innovative leader in retail real estate solutions, Lucernex continues to grow its customer base by applying its Web-based software expertise and real estate development insight to provide advanced tools and services for business. Page 11